CH32 Monetary Policy Flashcards
What is monetary policy?
Use of interest rates and money supply by the central bank to control AD in the economy
What is the goal of monetary policy?
influence the level of economic activity through changes to the money supply and interest rates
What is money supply?
Amount of money in circulation in the economy
What are interest rates?
The price paid to lenders for borrowed money, basically the price of money
What is the role of the central bank?
-Implementing the government’s monetary policy
-Acting as a ledner of last resort to commercial banks
-Controlling inflation and stabilising a nations currency
- Setting interest rates
What is contractionary monetary policy?
The decrease of AD by increasing interest rates and decreasing money supply
What is expansionary monetary policy?
The increase of AD by decreasing interest rates and increasing money supply
What is the impact of changes in interest rates on inflation?
Inflation is caused by the money supply growing too quickly. The central bank can then use contractionary monetary policy to decrease the money supply, raising interest rates and therefore decreasing AD
What is the impact of changes in interest rates on unemployment?
The government might need to reduce interest rates. If interest rates go down then demand for loans will increase leading to higher spending by firms and households which leads to higher demand for goods and services and therefore lower unemployment
What is the impact of changes in interest rates on Economic growth?
The government can decrease interest rates to promote economic growth
What is the impact of changes in interest rates on the current account balance?
To reduce a current account defecit, the goverenment might use contractionary monetary policy to minimize AD, leading to lower demand and reduce imports.
How does interest rate impact consumers?
When interest rates fall, the demand for loans will increase, therefore they will spend more money. When interest rates increase, the demand for loans will decrease, leading to less money spent.
How does interest rate impact firms?
Firms using borrowed money like mortgages to fund business activity would benefit from low interest rates as they can now borrow more money to invest in their business. High interest rates might lead to costs being cut.
What is quantatative easing?
A system where the bank generates cash electronically and uses it to buy assets from the government and financial institutions.
